This paper presents a macroeconomic model containing optimizing, inventory-holding firms that is consistent with a number of prominent empirical regularities concerning fluctuations in output, exchange rates, relative prices, and money. Prices are sticky, but they are not predetermined. Still, our model is consistent with exchange rate overshooting in the sense of Dornbusch. Typical sticky-price models allow a divergence between current production and current demand, but this divergence is never allowed to feed back into the model. Our optimal inventory adjustments reconcile divergences between current demand and production, and the inventory stock movements provide expected future dynamics.
Flood, Robert, and Robert Hodrick. "Optimal Price and Inventory Adjustment in an Open-Economy Model of the Business Cycle." Quarterly Journal of Economics 100, no. 4 (1985): 887-914.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.